Wall Street Plays Washington

Is the charade played out on Wall Street and in Washington anything more than the equivalent of a dinnertime show at a casino complex?

Politicians and bankers work the stage while the media maitre’d pretends to care how you really feel. Ultimately, the curtain goes down, the lights go on and you’re stuck with a bill that leaves you aghast.

Late payments on home-equity loans rose to a record in the first quarter as 18 straight months of job losses and a slumping economy left more borrowers unable to pay their debts, the American Bankers Association reported.

For those not aware, Turbo-Tim Geithner’s Bank Stress Test utilized an assumed cumulative loss on this product of 6-8% in the base case. The most adverse scenario assumed cumulative losses on HELOCs of 8-11%.

What did our 12th Street Capital friends learn in their analysis? KD writes:

What I find very interesting here is comparing the Cumulative Loss numbers on these deals versus the Government’s assumption of losses in the stress test. As a reminder, our friends in D.C. assumed in a More Adverse Scenario that Helocs on bank balance sheets would generate losses of 8% to 11%. Now I know their numbers represent the projections going forward for the next two years, but when you take a look at numerous ‘06 and ‘07 deals already ringing up losses north of 20% I find it hard to reconcile. I think the Treasury has a very rosy picture of the loss curve going forward.

This brings us to the topic of losses within the banking system and the integrity of the Bank Stress Tests. The Wall Street banks were more than happy to “put on a show” with Secretary Geithner leading the orchestra and the FASB in a supporting role given their relaxation of the mark-to-market. Now we get to revisit the fact that banks are still sitting on hundreds of billions in embedded losses.

“We expect continued weak bank results in the second quarter as credit pressures continue”

Continued weak bank results? I thought the banks had surprisingly good results in the 1st quarter. Do you mean those results were fictitious and earnings were more ‘managed’ than actually truly generated?

Yes I do!!

Going forward, Bloomberg reports that Deutsche Bank believes:

Banks will likely report losses for the second half of this year and much of 2010, according to the report. O’Connor said “normalized” earnings will take longer to achieve than most analysts predict, and he said the eventual level of normalized profit will likely be lower than current estimates.

“This is being driven by consumer losses remaining elevated longer than expected, commercial and related losses possibly reaching to 10 to 11 percent in 2009 to 2011,” O’Connor wrote.

Normalized? What does that mean? Have results to this point been abnormal? No, normalized means operating without a shadow banking system (i.e. a loan securitization model).

While Wall Street and Washington did their song and dance, Sense on Cents has tried to highlight the lack of integrity in the testing process from the outset. In April I wrote “Bank Stress Tests: Major Sham?”

What does the FDIC, led by Ms. Bair, have to say about the upcoming Bank Stress Tests? The New York Post provides a CHILLING perspective:

The tests are conducted by the Treasury Department and the Federal Reserve on the nation’s 19 biggest banks, including behemoths Citigroup, Bank of America and JPMorgan Chase.

“It’s a sham,” one source told The Post, describing the test as an “open-book, take-home exam” that doesn’t actually work.

While the Washington and Wall Street actors perform on stage, the bill for this charade runs ever higher.

I do not want to continue to see this performance. In fact, give me a backyard barbecue, a beer, and a ballgame anytime.

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.